TABLE OF CONTENTS:

Preface xiv
Acknowledgements xvi

1: The finance function 1
Learning objectives 1
Introduction 2
1.1 Two key concepts in corporate finance 2
1.2 The role of the Financial Manager 6
1.3 Corporate objectives 8
1.4 How is shareholder wealth maximised? 12
1.5 Agency theory 14
1.6 Corporate governance 21
1.7 Conclusion 28
Key points 31
Self-test questions 32
Questions for review 33
Questions for discussion 34
References 34
Recommended reading 35

2: Capital markets, market efficiency and ratio analysis 36
Learning objectives 36
Introduction 37
2.1 Sources of business finance 37
2.2 Capital markets 40
2.3 Capital market efficiency 42
2.4 Assessing financial performance 50
2.5 Conclusion 71
Key points 71
Self-test questions 73
Questions for review 74
Questions for discussion 75
References 77
Recommended reading
3: Short-term finance and working capital management 80
Learning objectives 80
Introduction 81
3.1 The objectives of working capital management 81
3.2 Working capital policies 81
3.3 Working capital and the cash conversion cycle 88
3.4 Overtrading 92
3.5 Managing inventory 93
3.6 Managing cash 97
3.7 Managing trade receivables 101
3.8 Conclusion 106
Key points 106
Self-test questions 107
Questions for review 107
Questions for discussion 108
References 110
Recommended reading 111

4: Long-term finance: Equity finance 112
Learning objectives 112
Introduction 113
4.1 Equity finance 113
4.2 The Stock Exchange 115
4.3 Rights issues 123
4.4 Scrip issues, share splits, scrip dividends and
share repurchases 129
4.5 Preference shares 131
4.6 Conclusion 133
Key points 134
Self-test questions 135
Questions for review 136
Questions for discussion 137
References 139
Recommended reading 139

5: Long-term finance: Debt finance, hybrid finance and leasing 140
Learning objectives 140
Introduction 141
5.1 Bonds, loan notes, loan stock and debentures 141
5.2 Bank and institutional debt 148
5.3 International debt finance 150
5.4 Convertible bonds 151
5.5 Warrants 155
5.6 Valuing fixed interest bonds 157
5.7 Valuing convertible bonds 159
5.8 Leasing 162
5.9 Evaluating the financial effects of financing choices 167
5.10 Conclusion 169
Key points 169
Self-test questions 171
Questions for review 172
Questions for discussion 172
References 174
Recommended reading 174

6: An overview of investment appraisal methods 176
Learning objectives 176
Introduction 177
6.1 The payback method 177
6.2 The return on capital employed method 179
6.3 The net present value method 182
6.4 The internal rate of return method 186
6.5 Comparing the NPV and IRR methods 190
6.6 The profitability index and capital rationing 194
6.7 The discounted payback method 200
6.8 Conclusion 200
Key points 201
Self-test questions 202
Questions for review 203
Questions for discussion 205
References 206
Recommended reading 206

7: Investment appraisal: applications and risk 207
Learning objectives 207
Introduction 208
7.1 Relevant project cash flows 208
7.2 Taxation and capital investment decisions 209
7.3 Inflation and capital investment decisions 215
7.4 Investment appraisal and risk 218
7.5 Appraisal of foreign direct investment 225
7.6 Empirical investigations of investment appraisal 233
7.7 Conclusion 236
Key points 236
Self-test questions 238
Questions for review 238
Questions for discussion 240
References 243
Recommended reading 244

8: Portfolio theory and the capital asset pricing model 245
Learning objectives 245
Introduction 246
8.1 The measurement of risk 246
8.2 The concept of diversification 250
8.3 Investor attitudes to risk 256
8.4 Markowitz’s portfolio theory 259
8.5 Introduction to the capital asset pricing model 262
8.6 Using the CAPM to value shares 262
8.7 Empirical tests of the CAPM 272
8.8 Conclusion 277
Key points 277
Self-test questions 278
Questions for review 279
Questions for discussion 281
References 282
Recommended reading 283

9: The cost of capital and capital structure 285
Learning objectives 285
Introduction 286
9.1 Calculating the cost of individual sources of finance 286
9.2 Calculating the weighted average cost of capital 290
9.3 Average and marginal cost of capital 293
9.4 The CAPM and investment appraisal 294
9.5 Practical problems with calculating WACC 301
9.6 WACC in the real world 302
9.7 The cost of capital for foreign direct investment 305
9.8 Gearing: Its measurement and significance 307
9.9 The concept of an optimal capital structure 311
9.10 The traditional approach to capital structure 313
9.11 Miller and Modigliani (I): Net income approach 314
9.12 Miller and Modigliani (II): Corporate tax 317
9.13 Market imperfections 318
9.14 Miller and personal taxation 320
9.15 Pecking order theory 321
9.16 Conclusion: Does an Optimal Capital Structure Exist? 322
Key points 323
Self-test questions 325
Questions for review 326
Questions for discussion 327
References 329
Recommended reading 330

10: Dividend policy 332
Learning objectives 332
Introduction 333
10.1 Dividends: Operational and practical issues 333
10.2 The effect of dividends on shareholder wealth 336
10.3 Dividend irrelevance 336
10.4 Dividend relevance 338
10.5 Dividend relevance or irrelevance? 342
10.6 Dividend policies 343
10.7 Alternatives to cash dividends 349
10.8 Empirical evidence on dividend policy 356
10.9 Conclusion 357
Key points 358
Self-test questions 359
Questions for review 360
Questions for discussion 361
References 363
Recommended reading 364

11: Mergers and takeovers 365
Learning objectives 365
Introduction 366
11.1 The terminology of mergers and takeovers 366
11.2 Justifications for acquisitions 367
11.3 Trends in takeover activity 372
11.4 Target company valuation 376
11.5 The financing of acquisitions 384
11.6 Strategic and tactical issues 388
11.7 Divestment 398
11.8 Private equity 404
11.9 Empirical research on acquisitions 406
11.10 Conclusion 409
Key points 410
Self-test questions 411
Questions for review 411
Questions for discussion 413
References 417
Recommended reading 418
12: Risk management 419
Learning objectives 419
Introduction 420
12.1 Interest and exchange rate risk 420
12.2 Internal risk management 428
12.3 External risk management 430
12.4 Futures contracts 432
12.5 Options 435
12.6 Swaps 441
12.7 Issues in interest and exchange risk management 446
12.8 Political risk 455
12.9 Conclusion 457
Key points 457
Self-test questions 459
Questions for review 460
Questions for discussion 461
References 462
Recommended reading 463
Answers to self-test questions 465
Glossary 484
Present value tables 493
Index 495
Publisher’s acknowledgements 514